Category Archives: industry

We also need to keep investing in clean energy like wind power and solar power.

… And as long as I’m President, we are going to keep on making those investments. I am not going to cede the wind and solar and advanced battery industries to countries like China and Germany that are making those investments. I want those technologies developed and manufactured here in Ohio, here in the Midwest, here in America. (Applause.) By American workers. That’s the future we want.

The President has picked three industries and is arguing for an industrial policy to subsidize them in part because other countries are subsidizing them.

Let’s extend this logic. Suppose China or Germany starts subsidizing the biotech industry. Should the U.S. government subsidize American biotech firms so that “those technologies [are] developed and manufactured … here in America, by American workers?”

What if China subsidizes web development firms, Germany subsidizes auto manufacturers, France subsidizes biotech firms, Japan subsidizes advanced battery firms, Brazil subsidizes ethanol firms, and South Korea subsidizes chip manufacturers? Should the U.S. subsidize all of those domestic industries so that we don’t cede any of them?

What if the Canadian or Mexican government were to subsidize high-tech oil production firms, or Brazil to subsidize advanced tobacco production? Is the President’s policy to keep here in American through subsidies all industries that other governments are subsidizing, or only the “good” industries that he thinks should be kept in America?

More generally, should the U.S. government (a) subsidize particular industries and if so (b) determine those subsidies based on what other countries are doing?

If we are to subsidize particular industries over others, how do we square that with the argument, made by the President and others, that we need to remove such subsidies from the tax code?

If the rule for structuring subsidies is to make sure we don’t cede certain industries to other countries, how is that different from giving the governments of those countries control over the shape and structure of the U.S. economy?

If the President wants to subsidize wind and solar power because he wants to accelerate the development of carbon-free alternatives to coal and natural gas, he should make that argument. If President Obama is instead going to subsidize industries either because he likes them or because other Nations’ governments are subsidizing them, then we must acknowledge that he is engaged in industrial policy, aka state-managed capitalism, with an open question about whether the managing state is based in DC, Berlin, or Beijing.

Our employment has been shifting from manufacturing to services for decades, as it shifted from agriculture to manufacturing in the 19th century (all while American manufacturing output continues to grow over time);

We have been dependent on oil as a fuel source for oh, about 100 years;

The seminal report on American education, A Nation at Risk, was published in 1983, yet it reads as if it were written this year; and

Income inequality has been increasing since about the 1970s, while even the spike in inequality at the very high end is probably 20ish years old.

There is nothing wrong with prioritizing long-term economic problems and challenges; in fact, quite the opposite. Washington usually focuses only on problems and challenges that will bite before the next election.

And yet:

The President barely mentions the greatest long-term (and, increasingly, short-term) economic policy challenge we face, the size and growth of unfunded entitlement spending promises to the (current and future) elderly;

The second greatest long-term economic policy challenge, closely related to the first, continues to be the unsustainable growth in per capita health spending, notwithstanding mistaken claims that the Affordable Care Act will slow that growth;

The most urgent economic policy challenge we face is the slow recovery of the U.S. labor market, with housing weakness and macro/financial threats from Europe in a close second and third;

In last year’s State of the Union address, President Obama framed the central policy challenge as infrastructure and public investment competition from China and India, something that doesn’t really make his top four this year (his manufacturing message is somewhat different);

President Obama emphasizes frequently that he doesn’t want to “return to the policies of the past,” meaning the Bush era, yet these policies were not the cause of the problems he now stresses; and

The President is not claiming that his proposed policies would solve even a significant portion of the problems he describes.

I would like instead to see the President set economic policy priorities like these:

Clear out the barriers to private sector expansion and investment, in particular by reducing both the drags induced by recently enacted expansions of government and the massive uncertainty caused by lingering open policy debates;

Stop trying to “fix” the housing market and let housing prices find a painful but market-clearing bottom so that more normal growth could resume;

Make structural reforms to Social Security and Medicare and Medicaid that adapt them for inevitable demographic trends as well as evitable unsustainable promised benefit growth; and

Aggressively expand international trade and investment rather than throw up protectionist barriers and rhetoric.

The massive recent and planned future expansions of government are the greatest threats to ongoing American economic strength in both the short and long term. Expanding the scope of government further as the President proposes will make things worse, not better.

Here is my view of the 10 most important American economic policy issues of 2010.

1. The weak U.S. macroeconomy

In 2010 a weak macroeconomy once again swamped in importance all other economic policy issues. Forecasters had predicted a tough year — the 9.7% average unemployment rate for the first 11 months of the year is not far above the Administration’s 9.3% forecast for the year.

In 2011 the most important metric will once again be the unemployment rate. Economically as well as politically the focus will once again be almost entirely on job creation. We need the economy to be generating hundreds of thousands of net new jobs each month. That is unlikely but not impossible.

Most forecasters project a stronger U.S. economic growth path in 2011 than 2010, but few are projecting that growth will be robust enough to bring the unemployment rate down rapidly. While this week’s unemployment claims took a turn for the better, that’s a volatile data set, and the labor picture over the past few months has been weak. If the forecasts hold up, things will be bad but improving throughout 2011. You decide whether the politics and press will focus on the bad or the improving part.

Please remember not to lean too heavily on economic projections. My rule of thumb is that the best macroeconomic forecasts get unreliable six months out and are not much more than guesses beyond a year.

2. The failure of fiscal stimulus

This trend began in 2009 and solidified in 2010. The fiscal stimulus debate camps and arguments are well established, and because the debate relies on comparison to a counterfactual it may never be provably resolved, allowing economists to argue ad nauseam.

Whatever your view on the policy question, as a political matter the stimulus failed miserably. There are a few easily identifiable errors.

The President repeatedly took too optimistic of a tone relative to what his experts projected on something that was largely beyond his control.

Team Obama gambled and lost by creating an unverifiable “jobs saved or lost” metric. Sometimes the unverifiability worked for them, but ultimately it broke against them because a job saved by policy is neither provable nor visible.

The policy path the President chose in early 2009 (more accurately, the path to which he acquiesced when Congress chose it) set up countless “waste, fraud, and inefficiency” stories throughout 2010.

After February 2009, every time the President signed another bill “to create jobs,” he reinforced the message that his first stimulus law was failing or at best insufficient.

3. The stimulus vs. austerity debate

The U.S. is now left of Germany and the U.K. on fiscal policy in rhetoric if not result. That is both weird and disturbing.

4. (Temporary?) enactment of the health care laws

The President and his allies had a huge policy victory here. I think these laws are an unmitigated disaster, the largest economic policy mistake in a long time. The President and his allies created a massive new entitlement, spent budget offsets needed to address our long-term spending problem and therefore made future middle class tax increases a near certainty, and turned health insurance into a regulated utility.

The ongoing pushback from Republicans, even after enactment, was a wonderful surprise from a party that had for too long been afraid to debate health policy. Democrats had to delay implementation of the most expensive provisions for a few years, allowing Republicans time to mount a repeal campaign that continues to build steam. My first big blog mistake of the year was prematurely declaring the legislation dead after Scott Brown’s surprise victory in Massachusetts. My second (unpublished) mistake was assuming that the President’s signature was the endgame. It appears the 2012 Presidential election will be in part a referendum on these laws.

5. Enactment of financial services reform (Dodd-Frank)

This is another big policy win from the Administration’s perspective. I have mixed feelings on the law. Some parts (like creating resolution authority for regulators to shut down too-big-to-fail firms) are essential, others (like the Consumer Financial Protection Bureau) are harmful, and still others (like the long-term resolution of Fannie Mae and Freddie Mac) are unresolved.

Many policymakers appear to have convinced themselves that new policies and structures are (or, in a few years when the regs are complete, will be) in place to prevent large institutions from failing. I worry that we still don’t have a good solution for the next Black Swan event when (not if) one or more of those huge institutions do fail in spite of the new, better informed, and more powerful regulators.

6. Carbon pricing implosion

In less than four years carbon pricing has gone from front burner to burnt toast. The Climategate data fudging scandal undermined a previously strong positive public perception of climate scientists and their advocacy. In Copenhagen the global negotiations imploded after confronting the problem of the China-India hole in the U.S./green strategy. A Democratic House and Senate could not agree to carbon pricing legislation, demonstrating that regional economic perspectives are at least as important as policy philosophy. The President walked a tightrope between demonstrating to greens that he was with them and allowing himself an exit strategy when legislation inevitably failed. West Virginia Governor (and now Senator) Joe Manchin erased any doubt by literally shooting the Waxman-Markey bill in a campaign ad.

We now appear headed down the worst possible policy path. Congress will not enact legislation but the Environmental Protection Agency will start regulating greenhouse gas emissions and allowing/encouraging States to do so. This is the most economically burdensome way to regulate carbon emissions. It will be large enough to impose significant constraints on domestic power production and heavy manufacturing now, and maybe on other sectors later. Yet any reductions in U.S. emissions will be small relative to uncapped increases from China and India. EPA’s rules and Congressional efforts to block them will create policy uncertainty, deterring needed investment in the expansion of U.S. power production and slowing long-term economic growth. EPA’s regulatory authority always served two purposes to those who want to price carbon: as a threat to try to force legislative action, and as a costly fallback if legislation failed. The fallback option never made sense. It should but probably won’t be abandoned.

7. The Democratic Congress’ budget failures

From the perspective of Congressional Democrats, the health care and financial services victories counterbalance their two fiscal policy failures in 2010. Tax rates on income and capital will not increase during President Obama’s first/only term. They failed to enact full-year appropriations bills to fund the government, resorting instead to short-term continuing resolutions. The new Congress will have to complete the leftover appropriations work in early 2011. Many of the President’s spending goals will be unmet as he wrestles with a Republican House majority with very different priorities. I am pleased with both outcomes, which exceeded my initial expectations.

Both results can be traced directly to decisions by Speaker Pelosi, Senate Majority Leader Reid, and their respective Budget, Tax, and Appropriations Chairmen. They failed because they didn’t even try to govern. They never tried to pass a budget resolution, they delayed action on taxes until the last possible minute when Republicans were strongest, and they never tried to pass appropriations bills in the Senate. They missed an opportunity to create a reconciliation bill that would have allowed them (and the President) to win the tax extension debate. In each case these were unforced errors by Democratic Congressional leaders that significantly affected the fiscal policy outcomes of 2010.

8. Rise of the Tea Party

I have not much to add here other than to recognize that the small government impetus began with the early 2009 Santelli rant and exploded into summer 2009 Town Hall opposition to Obamacare. I now think of it not as a political party, but instead as a strong and deep anti-TARP-autos-bailout-stimulus-Obamacare-cap-and-trade-government-spending-earmarks-deficits sentiment. In simpler terms it’s a powerful populist pushback against the expansion of government. Over the next two years Republicans can succeed to the extent they respect this sentiment and push for smaller government and a bigger private sector.

9. Increasing awareness of medium-term fiscal problems

The bad news is America’s long-term fiscal problems are now medium-term fiscal problems. The good news is that Americans are increasingly aware of those problems, and pressure is building on elected officials to solve them. While nothing transformative on this front happened in 2010, several trends are important to note.

The shift from long-term to medium-term is a result of two factors: (1) inaction on entitlement spending over time by both parties; (2) enormous short-term deficits that are wiping out a projected temporary deficit trough before the Baby Boom spending wave hits. Those enormous short-term deficits result from (1) the weak economy; (2) actions taken to recover from the weak economy; and (3) a generic expansion of government spending unrelated to economic stimulus.

In February the President’s budget launched this round of fiscal debate by intentionally leaving a large deficit hole to be plugged by recommendations from a new Presidential fiscal commission. The President’s goals for that commission were too focused on the short run, and it’s unclear whether he intended the commission to solve the problem, provide him with cover for a proposal in early 2011, or just to buy him time through a mid-term election year. Nevertheless, the commission reported in December with a bipartisan package of spending reforms and tax increases, teeing the issue up nicely for 2011.

Enormous 2009 and 2010 deficits and massive spending increases in those years raised the prominence of both the size of government and fiscal imbalance as important policy issues.

Fiscal crises in Europe and looming fiscal crises in various U.S. States focus attention on the U.S. federal fiscal problem.

It’s always safe to bet against a big painful fiscal policy change, but if it’s ever going to happen, 2011 seems like as good a year as any. The 1997 budget deal was done by President Clinton, Speaker Gingrich, and Majority Leader Lott, a D-R-R alignment. This time we have a D-R-D alignment.

10. Round 2 of the Obama economic team

Three of the four key Obama economic advisor slots will be manned by different personnel in 2011 than a year earlier.

The departure of WH COS Rahm Emanuel and upcoming departure of Senior Advisor David Axelrod will also have a big effect on economic (as well as other) policy. My sources say they were heavily involved in almost all major economic decisions, sometimes operating as a separate decision-making layer between the economic team and the President.

Treasury Secretary Geithner and NEC Deputy Jason Furman are now the institutional memory of the Obama economic team.

Both Lew and Goolsbee are insiders who were promoted.

The President should have filled (or at least announced) Summers’ successor at NEC weeks ago. The fall is policy development time in the White House, and the President hurt himself by not having in place a successor to his top White House economic advisor.

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THE PRESIDENT: The auto interventions weren’t started by me — they were started by a conservative Republican administration. The only thing that we did was rather than just write GM and Chrysler a blank check, we said, you know what, if you’re going to get any more taxpayer money, you’ve got to be accountable.

In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals. These goals came from the legislation we (the Bush team) negotiated with Rep. Frank, Rep. Pelosi, and Sen. Dodd:

achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;

rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and

have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:

reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;

reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;

eliminate the jobs bank;

develop work rules that are competitive with the transplants by 12/31/09; and

convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process. We gave the President’s designee the authority to extend this process for 30 days.

In an earlier post I attempted to correct Dr. Austan Goolsbee’s incorrect and inflammatory statements about President Bush.I would like here to add my views to one additional question on the auto industry discussion on this morning’s edition of Fox News Sunday.

Host Chris Wallace moderated a discussion this morning with:

Dr. Austan Goolsbee, Member of President Obama’s Council of Economic Advisers and chief economist on the President’s Economic Recovery Advisory Board;

I offer kudos to Mr. Schmitt for his thoughtful responses throughout. And the hero of the discussion was Mr. Wallace, who in his questions demonstrated a deep understanding of the actual options faced by policymakers, the choices they made, and the serious consequences of those choices. I thank him for trying to elevate the policy discussion this morning.

WALLACE: Let me bring in Fred Malek, though. The President says that he has no interest in running businesses, he’s just trying to save them from collapse and get out. [plays clip of President Obama’s press conference] Fred Malek, in the middle of a financial crisis, in the middle of a terrible recession, could the President really let General Motors and Chrysler, AIG and Citibank go under?

MALEK: … I think what you have here, is you have two different situations. I would label the injection of capital into the financial institutions, stabilizing the financial systems, that’s a war of necessity. You had to do that. But, getting into General Motors, saving General Motors and then taking them into bankruptcy, that’s a war of choice, it’s the wrong choice.

Senator Shelby later commented on this same question, as did Mr. Malek again:

SHELBY: First of all, I advocated last fall that General Motors and Chrysler’s best bet would have go to Chapter 11 then, it would have saved a lot of money, not a political restructuring like what’s happened, where the bondholders have been sacrificed, the unions have carried the day.

MALEK: I agree with Senator Shelby. Look, we’ve had for decades we’ve had a bankruptcy system in this country that has worked well, and has fueled the free enterprise system in a positive way. It is impervious to politics because it’s run by federal courts. Now, what have you done? You have taken it out of the judicial and you’ve turned it over to the executive, and I think you’ve injected politics into it. Senator Shelby is right, there was no sense in putting billions of dollars in and then declaring Chapter 11 afterwards. They should have let them go into bankruptcy and let the courts work it through. …

Mr. Wallace then asks the critical follow-up question:

WALLACE: Let me just ask. Mr. Goolsbee, if at some point, either the Bush Administration back in the fall, or you guys when you took over, had just said, go into Chapter 11, we’re not going to take an ownership stake, we’re not going to give you 50 billion dollars, what would have happened?

The answer is that GM and Chrysler would have liquidated. Neither GM nor Chrysler was ready for a complex Chapter 11 filing. Had the entered the Chapter 11 process in December or January, the firms and every outside expert told us that the restructuring would have failed and the firms would have liquidated. We estimated this would have resulted in about 1.1 million lost jobs.

Mr. Malek was right, the loans to GM and Chrysler were a choice, but they were not the choice that he and Senator Shelby thought we faced. The choice was loan or liquidate. There was no feasible Chapter 11 option available at the time. (GM may fail even now, after they have had five months to prepare for Chapter 11.) Mr. Schmitt frames it correctly:

SCHMITT: It seems to me that what choice did we have except try to save General Motors, given the roughly million jobs that were related at a time of incredible pain and job loss. So if you think about it , the choice was bankruptcy, the supply chain goes away, the loss of the American automobile industry, or a band-aid. It needs to be a band-aid, and it needs to be something we get out of.

This morning on Fox News Sunday, host Chris Wallace moderated a discussion about the auto industry. One of his guests was Dr. Austan Goolsbee, who is a Member of President Obama’s Council of Economic Advisers and chief economist on the President’s Economic Recovery Advisory Board.

I want to focus on some incorrect and inflammatory statements by Dr. Goolsbee this morning:

Chris Wallace: I also want you to talk about the clash between policy and profits. The governments wants General Motors to make small cars, fuel-efficient cars, while all the indications are, that according to the market, the cars they make most profit on are SUVs and pickup trucks. So which takes preference? Profits for the taxpayer shareholders, or environmental policy?

Dr. Goolsbee: The President made totally clear in his remarks, and he specifically said we are not going to be in the business of telling General Motors or anybody else what kind of cars to make, where they should open their plants, or anything of the sort. The President made clear we want to get out of this as quickly as possible. We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement. They shook up the can, they opened the can, and handed to us in our laps.Senator Shelby knows that to be true. When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009? There was no commitment to restructuring, to making these viable enterprises of any kind. They made none of the serious sacrifices. And Republicans in the Senate attached a list of conditions, they opposed George Bush’s intervention, because they said the unions had not made the following sacrifices. In the Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for. So we have finally put them on that path.

This is incorrect. I will bite my lip, refrain from commenting on the tone, and focus on the facts.

History

At 3:30 pm on Sunday, November 30, 2008, a quiet meeting occurred at the Treasury Department in Secretary Hank Paulson’s office. Present for the Bush Administration were Treasury Secretary Paulson and Commerce Secretary Carlos Gutierrez, White House Chief of Staff Josh Bolten, Deputy COS Joel Kaplan, White House Legislative Affairs chief Dan Meyer, Treasury Legislative Affairs head Kevin Fromer, and me. Present for the incoming Obama Administration were Deputy COS-designate Mona Sutphen, NEC-designate Dr. Larry Summers, Dan Turullo (now a Fed Governor), and WH Legislative Affairs-designate Phil Schiliro. We had requested the meeting. They agreed and asked that it be held outside the White House. It appeared to us that they were quite concerned about leaks, and about the risk of creating a public impression that they were working closely with us.

At that meeting, we (the Bush team) floated a proposal to establish an auto czar. President Bush would create a new position called a Financial Viability Advisor (FVA) through an executive order. The President would instruct the FVA, for any auto manufacturer that sought a “bridge loan,” to evaluate that firm’s restructuring plan for viability. If after 60 days (which the FVA could unilaterally extend for another 30) the firm did not have a plan to achieve viability, then the FVA would produce his own plan to make that firm viable. The draft executive order was explicit that the FVA could include a Chapter 11 bankruptcy in his plan. We invited the Obama team to suggest names for the Financial Viability Advisor, so that it would be someone with whom the new President would be comfortable.

Under the Bush team’s proposal to the Obama team, the current Secretary of the Treasury (Paulson) would provide bridge funding from the TARP, and he would state that, as a matter of policy, no further TARP funding would be made available except in support of (1) a plan certified as viable by the FVA, or (2) the FVA’s own plan.

The key to success of this plan was that the Obama team would publicly link arms with us and agree that they would continue the Paulson policy statement when they took over after January 20th. Thus, the auto company’s stakeholders would know that they had no wiggle room, and that they had no chance of getting additional funding from the next Administration. The Obama team would voluntarily commit itself to be bound by the restriction self-imposed by the Bush team.

Remember that this was one of two huge issues going on at the time. The bigger issue was the financial crisis, and we were nearing the limit on the $350 B of available TARP funds. We were concerned that another too-big-to-fail institution might fail before January 20th without Treasury having the funds available to prevent a systemic collapse. So our proposal to the Obama team was a package deal: we will announce the above process for autos, and we will ask Congress for the second $350 B of TARP funding, if the President-elect publicly supports us on both. They would join with us in convincing Congress to approve the last tranche of TARP funding, since we would need help with Congressional Democrats.

We saw two huge economic issues that posed grave risks to the economy and to a smooth transition. We proposed to work together with the incoming Administration in a way that we thought minimized these risks and would have positioned the new President as well as possible on January 20th. GM and Chrysler would not be in liquidation, and there would be a strict, tight, and enforceable deadline (of about March 1) and process for GM and Chrysler to become viable or to have time to prepare for an orderly Chapter 11 process. We would have a cushion in case another major financial institution failed in the last eight weeks, and the next President would not have to be bothered with having to ask Congress for the last $350 B from the TARP.

The Obama team were polite and professional. They listened carefully and gave little reaction in the meeting. We concluded based on their questions in that meeting that they were leaning against the proposal, because they did not want to be bound by the judgment of a Financial Viability Advisor – they wanted the ability to make decisions in the White House. They also appeared to want to avoid being bound by our strict definition of viability. (We defined a viable firm as one that would, under reasonable assumptions, have a positive net present value without additional taxpayer assistance.)

Dr. Goolsbee was not in this meeting. I do not know if he was aware of it, either back in November or this morning.

Despite multiple efforts to get the Obama team on board, they did not take up our proposal, nor did they suggest any modifications. At the end of that week we gave up on that approach and began to negotiate a bill with Speaker Pelosi, Chairman Barney Frank, and Chairman Chris Dodd that would provide bridge loans from previously appropriated non-TARP funds.Senate Republicans blocked that bill. Congress adjourned for the year and went home. In the last week of December, GM and Chrysler told us they would file under Chapter 11 in early January if they did not get loans from the TARP. They also told us, as did countless outside experts, that they were not ready for such a filing, and that Chapter 11 would lead to near-immediate liquidation. We estimated that about 1.1 million jobs would be lost if this happened.

Confronted with a choice between loaning TARP funds to GM and Chrysler, and allowing both to liquidate in the weeks before his successor took office, President Bush authorized loans from the TARP to GM and Chrysler. We had warned Senate Republicans earlier that month that the President would face this choice if legislation failed. This was (and still is) a politically unpopular decision, and was the least worst of two bad options. Based both on his public comments and what I saw privately, President Bush wanted to give the firms a limited amount of time and a hard back end to prepare for and, if necessary, to force an orderly Chapter 11 process. He also knew that President-elect Obama would be facing tremendous challenges in his first days in office.Despite their different political parties and policy perspectives, President Bush stressed that we needed to provide his successor with the time and space he would need in the opening weeks of his Presidency.

Structure of the December loans to GM and Chrysler

In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.” Each plan also had to “include specific actions intended” to achieve five goals. These goals came from the legislation we negotiated with Frank, Pelosi, and Dodd:

achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;

rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and

have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies. There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable. We took the targets from Senator Corker’s floor amendment earlier in the month:

reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;

reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;

eliminate the jobs bank;

develop work rules that are competitive with the transplants by 12/31/09; and

convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called. Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process. We gave the President’s designee the authority to extend this process for 30 days.

In another error this morning, Dr. Goolsbee claimed the “Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for.” As I wrote last Monday (Understanding the GM bankruptcy), I have seen no convincing evidence that GM workers will now be paid competitive compensation with transplant workers, nor that the work rules are competitive with the transplants. The negotiations led by the Obama team did meet the Corker targets for the unsecured debt holders and the retiree benefits, but current workers still look to have received a relatively good deal.

Chronology

November 30: Bush team proposes joint solution to Obama team.

The following week: Obama team declines to respond. Bush team begins negotiations with House and Senate Democrats.

Late December: President Bush authorizes the above-described three month loans to GM and Chrysler.

January 20: President Obama takes office.

Mid-February: GM and Chrysler submit their first viability plans, per the terms of the Bush-era loans.

End of March: President Obama says GM and Chrysler have failed to develop viable plans, as required by the Bush-era loans. He gives Chrysler 30 more days, and GM about 60 until the end of May.

End of April: Chrysler files Chapter 11 with a pre-packaged plan negotiated largely by the Obama Administration.

June 1: GM does the same. Chrysler emerges from Chapter 11.

Responding to Dr. Goolsbee

Let’s again examine Dr. Goolsbee’s claim:

We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement. They shook up the can, they opened the can, and handed to us in our laps. Senator Shelby knows that to be true. When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009? There was no commitment to restructuring, to making these viable enterprises of any kind. They made none of the serious sacrifices.

Even if Dr. Goolsbee was not privy to the quiet discussion we had with the senior Obama team last November, the public record refutes his claim:

The Obama team declined to respond to the Bush team’s offer to work together to create a joint process that would have resulted in a resolution by March 1st or April 1st, rather than by June 1st for Chrysler and maybe September 1st for GM.

We then worked with the Democratic majority to enact legislation that would have limited funds to be available only to firms that would become viable.

After Congress left town for the holidays without having addressed the issue, President Bush was faced with a choice between providing loans and allowing these firms to liquidate in early January, which would have further exacerbated the economic situation for the incoming President. President Bush chose to provide the loans.

We provided GM and Chrysler with sufficient funds to get to March 31st, not January 20th, and in those loans we gave the incoming Administration the ability to extend them for 30 more days.

The loans were conditioned on restructuring to become viable, with a precise definition of viability, specific restructuring goals, and quantitative targets.

The Obama Administration followed the restructuring process laid out in the Bush-era loans. They are now measuring that deal against the targets established in the Bush-era loans. The only changes the Obama team made were that they extended GM for 60 days rather than 30, and the Obama Administration directly inserted themselves into the negotiations as the pre-packager.

Dr. Goolsbee’s comments this morning were both inflammatory and incorrect.

Many of you are new to this blog since I wrote extensively about autos six weeks ago. As background, I coordinated the auto loan process for President Bush last fall as the Director of the White House National Economic Council (the position now held by Dr. Lawrence Summers). I wrote a series of posts on the auto loans beginning when the President made his late-March announcements, and continuing into the spring. For reference, here are those posts:

I want to try to tease apart the various questions that get conflated in the public forum. My primary goal is to give you a structure for thinking about the issue. My secondary goal is to persuade you to agree with my views on each question. I will be satisfied if you give me credit for achieving only the primary goal.

Here is how I tease apart the questions:

What are the arguments for further government intervention?

Given these arguments, should the U.S. government intervene further by putting more taxpayer funding at risk to prevent GM from liquidating?

Is the pre-packaged bankruptcy likely to succeed?

Is it fair?

Did the government structure the taxpayer financing correctly?

Will the Administration run GM?

Let’s take them one-by-one.

1. What are the arguments for further government intervention?

Today the President explained why he chose to put another $30.1 B of taxpayer funds at risk to prevent GM from liquidating now. Speaking about his decision on March 30th, he said today:

But I also recognized the importance of a viable auto industry to the well-being of families and communities across our industrial Midwest and across the United States. In the midst of a deep recession and financial crisis, the collapse of these companies would have been devastating for countless Americans, and done enormous damage to our economy — beyond the auto industry. It was also clear that if GM and Chrysler remade and retooled themselves for the 21st century, it would be good for American workers, good for American manufacturing, and good for America’s economy.

This is more expansive than what President Bush argued last December:

In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws – and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.

The distinction is important. President Bush’s arguments were time-dependent: (a) we should try to prevent our weak economy from taking another big hit right now, and (b) let’s buy GM and Chrysler time to get ready to restructure. He also argued (c) that it was unfair to dump a liquidating auto industry on his successor (even if his successor might do something different than he would). It was a “too big to fail now” argument.

Today President Obama made it clear that he made the decision to commit additional funds, if his conditions were met, at the end of March. He then added new reasons to those expressed by President Bush: that America needs “a viable auto industry,” and that it would be good for America if GM and Chrysler survived. While he emphasizes what he would not do, “I refused to let these companies become permanent wards of the state,” President Obama defines a national interest in having auto manufacturers headquartered in the U.S. He reinforced that with his closing line, which was surreal:

And when that happens, we can truly say that what is good for General Motors and all who work there is good for the United States of America.

This is a big expansion of the justification for government intervention in the market. Ford is not failing, and Chrysler is emerging from bankruptcy. President Obama is arguing that American taxpayers need to fund the survival of a third (the biggest) U.S.-based auto manufacturer, because it is important “to the well-being of families and communities across our industrial Midwest and across the United States” and because “it would be good for American workers, good for American manufacturing, and good for America’s economy.” This argument could be extended to almost any large U.S. firm, at almost any time.

My view: I am extremely uncomfortable with the President’s expanded argument for further government intervention. Had the President instead argued, “The economy is beginning to recover, and we cannot jeopardize that with another major shock,” I would have been less uncomfortable with today’s commitment of additional taxpayer funds.

2. Given these arguments, should the U.S. government intervene further by putting more taxpayer funding at risk to prevent GM from liquidating?

The public debate has evolved in the past two months. Earlier this year the question posed was, “Should the Administration bail out GM?” The basic options were “yes,” “no,” and “only if they enter bankruptcy, and if they do they should try to pre-package it.” The President chose the last of these options. The President decided to put $30.1 B of additional taxpayer funding at risk to help prevent GM from liquidating in the near future, and to help them through a restructuring process.

If the firm survives the bankruptcy process intact, it has a higher probability of being viable in the long run (than in a restructuring outside of bankruptcy).

If the firm survives restructuring, the taxpayer has a higher probability of being repaid.

Old equity holders faced the full costs of the firm’s failure (by being wiped out). No additional moral hazard is created.

Costs

There are still significant risks to GM’s survival:

Will GM and the Administration defeat the objecting unsecured creditors in court? (however unfair that might be)

Will the bankruptcy process conclude quickly (within 90 days)?

Will GM continue to lose market share? Can GM make cars and trucks that people want to buy?

Will the new fuel economy and emissions rules restrict GM’s ability to make attractive vehicles?

This is a big new cash outlay from the taxpayer. This costs the taxpayer, and further constrains available TARP funds.

The President made clear his answer to this question on March 30th. At that time he laid out the conditions under which he would provide additional funding, and those conditions were met. No one should be surprised that he is now putting more taxpayer funding at risk. I am surprised that they only need $30 B.

My view: We crossed this bridge back in late March. It is not a new decision today to put more taxpayer funding at risk. I don’t like it, but I am at least glad that some incentives have been restored: the firm has to go through a bankruptcy process, shareholders are wiped out, and management was fired. I remember arguments from last fall and earlier this year that GM should get more taxpayer dollars outside of a bankruptcy process. That would have been far worse, and today’s actions mitigate some moral hazard.

Given the relative strength of the U.S. economy now compared to last December, I would have preferred an outcome of a pre-packaged bankruptcy + private DIP financing, and not exposing taxpayers to any additional risk. If GM is really as viable as GM and the President claim it now is, then they should have no problem convincing capital markets to provide them with short-term financing. (Judge Richard Posner argues this.) I will guess that this was not actually a viable option, because the pre-packaging could only come together with the direct involvement of the government. I think the real options would have been expose taxpayers to $30B more risk, or allow GM to liquidate. I would go with the latter: if GM can’t find private financing, they’re on their own. I assume this means they would liquidate. This would have been harsh and painful for those affected. I believe the consequences of further intervention now are worse for a larger number of people in the long run.

3. Is the pre-packaged bankruptcy likely to succeed?

There are two components to this question:

Is the bankruptcy process likely to be quick and successful?

Will the resulting company succeed without additional taxpayer aid?

I do not feel well-qualified to comment on the first question. The talking heads all repeat that “GM’s bankruptcy is more complicated than Chrysler’s,” with little detail about why. I would point out that the Administration is one for one in this process. Their use of this part of the bankruptcy code (section 363), and the process where the old GM sells the good stuff to a new GM, and then the remaining parts are liquidated, appears to have worked for Chrysler. From my perspective, the burden of proof now shifts to those who argue this bankruptcy will take more than 90 days. I didn’t like it because of the precedent it set, but I wouldn’t bet against the Administration succeeding again.

Other than the “good for GM is good for America” quote, the biggest surprise in the President’s remarks was how heavily he was betting that a restructured GM will succeed. He could easily have taken the posture, “GM has made some hard decisions, and they have a tough road ahead if they want to survive and succeed.” Instead, he attached his own credibility to GM’s future success and said:

So I’m confident that the steps I’m announcing today will mark the end of an old GM, and the beginning of a new GM; a new GM that can produce the high-quality, safe, and fuel-efficient cars of tomorrow; that can lead America towards an energy independent future; and that is once more a symbol of America’s success.

Even with a cleaned up balance sheet and more taxpayer funding, it is by no means certain that GM will survive for the long run. If GM fails in the next few years, the taxpayers will have lost an additional $30.1 B that the President committed today. In addition, the above quote will come back to haunt the President. I understand wanting to set a positive and optimistic tone. I am confused why he did so at such great political risk to himself.

I found it useful to return to my first post on the autos and review what this new pre-packaged bankruptcy + DIP financing does to the wide range of challenges faced by GM:

Revenues

The economic slowdown means fewer vehicles are being purchased from all auto manufacturers, foreign and domestic.

Even apart from the economic slowdown, U.S. auto manufacturers have been losing market share over time.

This is in part because they made a bet on light trucks versus smaller cars. This product mix doesn’t work when gas prices are high. Think of the proliferation of SUVs in the past 10 years. (Note that this was in part the fault of U.S. government policies. SUVs are technically light trucks, and so they qualify for lower fuel economy requirements.)

Costs & productivity

The Detroit 3’s ongoing labor costs are higher than those of foreign-based firms. This is still true when you compare an American worker in a GM plant in Michigan, for instance, with an American worker in a Nissan plant in Mississippi.

Productivity is lower in U.S. plants of U.S. firms than it is in U.S. plants of foreign-based firms. Some of this is because of the UAW contract that mandates certain inefficiencies. Some of it is poor management.

The Detroit 3 have huge dealer networks that are costly to the manufacturers. These dealer franchises are often protected by state laws that make it hard for the manufacturers to make these networks smaller and more efficient.

The Detroit 3 have enormous legacy costs from their retirees. Past UAW contracts provided generous benefits that continue to burden these firms. This drains profits (when they earn them) away from productivity-enhancing investments.

So can GM survive, and for how long? Can they profit and flourish, as the President suggests they will?

The Administration and GM argue that a restructured GM can break even in a national market of only 10m vehicles sold in America each year. (We’re now around 9.5m/year. “Normal” is around 16m/year.) If accurate, this is astonishing.This would appear to address all three of the bullets under revenues. Addressed? I’m skeptical. I need to review the assumptions in GM’s new plan, especially about market share.

I have seen no evidence that GM and UAW have reduced significantly GM’s ongoing labor costs to be competitive with the transplants. Maybe I have missed it. Unaddressed.

Productivity is still lower in U.S. plants of U.S. firms that it is in U.S. plants of foreign-based firms. As a result of high compensation costs per worker and low productivity, it appears that labor cost per vehicle produced will still be uncompetitive with the transplants. Unaddressed.

GM’s dealer network is being dramatically reduced. Addressed.

The CAFE and emissions requirements are even more burdensome than predicted, but now have at least some degree of stability, given the national standards. On net, worse than before.

The balance sheets will be relieved of enormous debt and legacy health and pension obligations. Addressed.

My view: I need to look more at what GM is assuming for market share. The removal of the legacy obligations, combined with a big chunk of taxpayer change, will buy then many months of survival.

The Administration is stressing the balance sheet improvements, and they deserve credit for that. Conservative critics focus on the additional burdens of the fuel economy and emissions rules, and they’re right, too.

I would focus even more on the questions asked by several commenters: “Will people want to buy GM cars and trucks?” Additionally, can GM make a profit with still high labor costs, still low productivity, still burdensome work rules, and still slow product development cycles?

I want to GM to survive and be profitable in the long run. Their chances are now drastically improved, assuming they survive bankruptcy. But I don’t know if that’s an improvement from a 1% chance to a 20% chance, or from a 1% chance to an 80% chance. A lot more needs to change beyond just cleaning up the balance sheet, and many of those needed changes are deep-seated in the culture, structures, and processes of America’s third-largest company.

4. Is the pre-packaged bankruptcy fair?

Absolutely not. But I want to be precise in my criticism.

The easiest thing to do in Washington is to criticize the negotiator. “I could have gotten a better deal,” we say. I should begin my expressing my sympathy and offering my congratulations to Steven Rattner and the Obama team for closing what was undoubtedly a complex and difficult set of negotiations. I’m sure this one was not easy, and theirs was a thankless task.

At the same time, I share the concerns of many that the deal was not even-handed, and that the precedent will damage future business lending. I have grave concerns about how far they were willing to stretch bankruptcy processes and the traditional capital structure to get a deal.

Secondly, as you know, the UAW has reached a new agreement with GM and that agreement has been ratified that involves significant concessions by the UAW … concessions that are in virtually every respect more aggressive than what the previous administration demanded in its loan agreement.

In the term sheet for the December loan we (the Bush Administration) made to General Motors, we set out “targets,” which we took directly from the Corker amendment offered the week prior on the Senate floor:

Reduce outstanding unsecured debt by not less than 2/3 through conversion into equity or other debt;

Reduce the total amount of compensation, including wages and benefits, paid to their U.S. employees so that, by no later than December 31, 2009, the average of such total amount, per hour and per person, is an amount that is competitive with the average total amount of such compensation, as certified by the Secretary of Labor, paid per hour and per person to employees of Nissan Motor Company, Toyota Motor Corporation, or American Honda Motor Company whose site of employment is in the United States.

Eliminate the jobs bank.

Apply work rules no later than 12/31/09 “in a manner that is competitive with Nissan … Toyota or Honda in the U.S.”

Not less than half of their VEBA payment should be in the form of stock.

As best I can tell:

They more than accomplished target #1.

They did little to nothing on #2. I have seen no evidence that compensation of current workers has been changed. UAW Chief Ron Gettelfinger claimed in a message to his members, “For our active members these tentative changes mean no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions.” Maybe there’s a distinction between this statement and “total compensation.” If so, it would be great if someone could help me understand this. But it appears GM and UAW did nothing to address target #2.

UAW agreed to #3 in late March.

They made no apparent progress on target #4. I have neither seen nor heard evidence that the work rules have been relaxed. I am happy to be corrected.

They accomplished #5.

It was incorrect for the Senior Administration Official to call these “demands” of the Bush Administration. They were targets, not hard conditions. It is an overstatement to say that they “are in virtually every respect more aggressive than what the previous Administration demanded,” unless “virtually every respect” means “except for compensation and work rules.” (I am happy to be corrected if I have just missed the changes.)

Critics say it is unfair that the restructuring plan gives the union health trust a larger share of the new GM than the bondholders. But administration officials defend the plan, offering several justifications.

First, they note that the terms of the proposed GM restructuring echo the terms laid out by the Bush administration in December, when it extended $13.4 billion in loans to GM.

The Bush administration’s loan agreement required a 50 percent reduction or “haircut” for the union trust, but a 66 percent cut for the bondholders. The Obama deal requires larger cuts for both sides, though more for the bondholders.

The agreement does more than meet three of the five targets laid out by the Administration. It appears to make no progress on the other two targets. Thus the terms do not “echo the terms laid out by the Bush administration in December.”

More importantly, the targets we (Bush team) laid out said nothing about the distribution of equity shares. The criticism is not that the deal doesn’t cut the VEBA enough, or reduce unsecured debt enough. The criticism is that someone lower in the capital structure (UAW’s VEBA) got a much greater equity share than someone higher in the structure (unsecured creditors). It is disingenuous to point to the targets in the Bush Administration’s December loans to justify this inequity.

The deal is unfair to unsecured creditors, because they get a worse deal than someone standing behind them in line (the UAW’s VEBA). It has nothing to do with who those parties are (labor vs. creditors). It is about the importance of maintaining a stable and predictable set of rules to govern the capital structure of a firm, and the value that stability creates for firms’ ability to raise capital. All these arguments boil down to the cardinal rule of waiting in line for the kindergarten bus: it’s not fair to cut in line. If that rule is broken too often, chaos ensues.

The Administration could be arguing, “Sure it’s unfair, but UAW had more leverage on us than the creditors, so we struck the best deal that we could. We needed UAW to sign onto the deal, while we thought we could roll the creditors in court.” This would better justify the disproportionate equity shares than claiming, “This is a fair deal.”

The objecting creditors will now defend their rights in court. If the Chrysler precedent is an example, you should bet against them. It is interesting that the President did not attack them as “speculators” this time, so at least the rhetorical leverage against them is weakened.

My view: I am more concerned with the signals this unfair treatment sends to future investors. I worry that the President’s actions create political risk and will permanently raise the cost of capital for certain firms. I wish I knew whether a different prepackaging was possible, one which would have maintained the precedence of the capital structure and did not stretch the bankruptcy process again. Unfortunately, it is impossible to know.

5. Did the government structure the taxpayer financing correctly?

Judge Richard Posner argues the government should have provided a loan rather than taken an equity stake in GM. The President suggested one reason why they preferred an equity stake: a loan would further burden GM with a stream of near-term interest payments to the government.

I think Judge Posner strikes a nerve with his suggestion. It seems that much of the public discomfort comes from the government now being the owner of GM. It’s the 60% number that made me gasp. It highlights a tradeoff between two goals on which conservatives focus: value for the taxpayer, and avoiding government interference and control. There is a tradeoff between the two.

I believe the U.S. government could auction its equity shares late this year and divest itself completely from General Motors.This would solve the government ownership problem. In doing so, I presume that taxpayers would recoup far less than the $30 B of cash provided.

Question for conservatives: How much of a loss are you willing to take on the $30 B to get the U.S. government out of GM quickly?

My view: I assume there is a non-trivial chance that GM may still fail in the next several years. I like the President’s and his team’s strong language today that this $30 B is the last taxpayer aid, but I would like to reinforce that by ending the government’s ongoing involvement in GM as quickly as possible. I am willing to sacrifice a significant portion of the $30 B to achieve that goal. I therefore recommend that, if GM emerges from bankruptcy, the Administration then establish a much more rapid timetable for selling its equity stake, even if that means the taxpayer loses much of the $30 B. Get us out of GM before the end of 2010. This will strengthen the bulwark against providing additional taxpayer funds if GM fails again.

Note:

Under current law, the authority to provide any firm with additional TARP funding expires December 31, 2009.Correction: Secretary Geithner can, after notifying Congress, extend the TARP authorities to October 3, 2010.

The “set a timeline” argument has direct parallels to a certain national security debate.

6. Will the Administration run GM?

Here I give the Administration credit for good intent and good initial execution. I take at face value the President’s statement that he does not want to run or control GM, and I give him points for saying so explicitly. I am sure there are others, including some in his Administration and some on Capitol Hill, that would love to run GM as Government Motors. I will trust the President when he says he is not one of those people.

I further give the Administration credit for the “Principles for Managing Ownership Stake” they released in today’s fact sheet. While they are being released in the specific context of the U.S. government’s new equity stake in GM, the White House writes more generally “(T)he Obama Administration has established four core principles that will guide the government’s management of ownership interests in private firms.”

The government has no desire to own equity stakes in companies any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable. Our goal is to promote strong and viable companies that can quickly be profitable and contribute to economic growth and jobs without government involvement.

In exceptional cases where the U.S. government feels it is necessary to respond to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is practically feasible.

After any up-front conditions are in place, the government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.

As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.

Given that I trust the President’s statements on this point, the risks here are unintended consequences, from within his own Administration and from the Congress. They are big risks, and these are dangerous waters. I hope the Administration treads carefully.

My view: Given the undesirable situation of government equity stakes in, and even controlling ownership of, firms like GM and AIG, as well as potentially Citigroup and other banks, these are good principles. They are also easy to monitor. It is interesting and good that the White House fact sheet says, “The [UAW’s] VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.” (emphasis added)

I urge the President to:

Enshrine the principles from today’s fact sheet in the term sheets for the taxpayer investments in GM (and other firms). We did this last December in the GM and Chrysler term sheets. Tie yourself to the mast. This will give you an easy excuse later when someone pressures you to vote those shares in a way that conflicts with the taxpayer’s interest.

Set clear rules for Administration contacts with GM – it’s probably best to funnel all contacts through specific Treasury or NEC officials on the autos task force. No freelancing phone calls to the Administration-appointed directors or “informal chats” with them from White House staff, or from DOT, EPA, USTR, DOE, even State. Put a firewall around interactions with GM.

Come out hard and quickly against the first proposal from a Member of Congress to leverage the ownership stake for a non-taxpayer goal. Nip it in the bud, especially if the idea comes from a friend.

It’s easy to criticize a huge decision like the one made by the President today. I strongly disagree with where we are headed, and I am concerned with the precedent that this deal sets for capital investment in American firms. The alternative, however, is that you have to be willing to allow GM to fail. I would be willing to do so, and it is therefore easy for me to express my views. In summary, they are:

I am extremely uncomfortable with the President’s expanded argument for today’s government intervention.

My first choice would have been to push GM to get private DIP financing. Assuming that was infeasible, I would have recommended denying GM the DIP financing, even if that meant they would liquidate. The economy is sufficiently healthier now than it was last December that I would be willing to risk the additional shock. But I agree the President crossed this bridge at the end of March.

I would bet in favor of GM emerging from bankruptcy, and against them surviving as an intact firm for 5 years without additional taxpayer funding.

The pre-packaging deal was unfair to unsecured creditors, to the benefit of UAW retirees. The Administration loses credibility with me by trying to argue this was a fair deal. They would have been more credible if they had argued it was the only deal they could get. I worry that the President’s actions create political risk and will permanently raise the cost of capital for certain U.S. firms.

If a loan rather than an equity purchase had been possible, I would have preferred that – I find Judge Posner’s arguments persuasive. Given the equity investment, I urge the Administration to divest as quickly as possible, even if it means a loss to the taxpayer.

Given the undesirable situation of the U.S. government owning GM and other large firms, the Administration’s new “Principles for Managing Ownership Stake” are solid. They need to lock them in, and corral or beat back all those people who work in the Executive Branch and Congress who have other goals in mind for GM and will be tempted to exert some leverage.

I thank you for making it through this extremely long post, and again want to thank all of the fantastic commenters. If you dislike the President’s announcement, I urge you to consider this question: Suppose the deal announced today were the only possible pre-packaged bankruptcy, and your choice was to take it or allow GM to liquidate now. What would you do?

In a few hours I will offer my thoughts and reactions to the General Motors bankruptcy filing and the President’s noon announcement. For now, here is what I have been able to figure out from the White House fact sheet and secondary source reporting through CNBC and the Wall Street Journal. I assume that both sources are being fed directly from the White House, Treasury, and GM, so I think there is a high probability these sources are accurate.

Note that I do not generally intend to become a news source. I will instead focus on analysis. What you see below is a variant of something I whipped up this morning for my old Administration colleagues that I thought I would share with you as well.

In my experience both on the White House and on Capitol Hill, I found that it was sometimes helpful to my principal to collect and group information as you see it below. There are a lot of good reporters, but they sometimes structure their stories in ways that make it hard to understand. TV business news tends to release the information as it comes out. So while you could learn everything below from the WSJ, CNBC, and the fact sheet, I hope that the structure makes it easier to process.

This is the kind of presentation I might have dashed off for President Bush or Senator Lott for a big news item so they would not have to spend time digging through press coverage. This is one of those “fold it up and put it in your inside jacket pocket” memos. Also, as a principal it’s nice to know what you need to know. You can have the confidence that, if you know this information, you have a basic but thorough understanding of what’s going on. (Hint to my Hill friends: feel free to use this for your boss. You just saved an hour.)

Process

GM’s bankruptcy filing was expected to be at 8 AM EDT in NY Southern District in Manhattan. (CNBC)

Approximately 12% of equity goes to the Canadian (and Ontario?) governments. They also get about $1.7 B in debt and preferred stock.

Bondholders of old GM get about 10% of the equity, for giving up $27.1 B in unsecured debt. This was approved by bondholders representing 54% of unsecured debt. The other 46% are the biggest risk for the bankruptcy filing. (CNBC, WSJ)

“Bondholders could take up to 25 percent of GM if it recovers to be worth what it was in 2004, before it began round after round of cost-cutting in what proved to be a failed bid to make up for lost sales.” (I need to understand this better.)

Secured bondholders expect to be paid face value. (WSJ)

Governance of the new GM

UAW’s VEBA can select one independent director, but cannot vote its shares or other governance rights(!) (White House fact sheet)

“Canadian government will have the right to select one initial director.” (White House fact sheet)

“The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government.” (White House fact sheet)

GM gets about $40 B of new cash to help pay its bills during bankruptcy. This is called debtor-in-possession (DIP) financing.

NewCo / OldCo

“Today GM is announcing its intention to close 11 facilities and idle another 3 facilities.” (White House fact sheet)

“[GM] has not provided an update target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States.” (CNBC)

“While the ‘new GM’ is expected to emerge quickly from court protection, the automaker’s shuttered plants, stranded equipment and other spurned assets would be left to liquidation in bankruptcy.” (CNBC)

Previously announced: “closing more than a dozen factories and shedding the Pontiac, Saturn, Saab and Hummer brands.” (WSJ)

GM will “shutter 2,600 dealers.” (WSJ)

“The new GM will also pursue a commitment to build a new small car in an idled UAW factory.” (WH fact sheet)

GM will shed more than $79B in debt. (WSJ)

“GM at the last minute also found buyers for some unwanted subsidiaries, including German-based Opel, which is being acquired by a consortium led by Canadian auto-parts supplier Magna International Inc., and the Hummer brand, whose buyer remained undisclosed.”

Future

“The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this [new $30.1 B] commitment.” (White House fact sheet)

“As a result of this restructuring, GM will lower its breakeven point to a 10 million annual car sales environment. Before the restructuring, GM’s breakeven point was in excess of 16 million annual car sales.” (White House fact sheet)

“The administration said the goal of the restructuring was to help GM be profitable in a year when the industry sells 10 million vehicles, versus the 16 million it sold in 2007.” (CNBC)

“GM will continue to honor consumer warranties.” (WH fact sheet)

GM is being removed from the Dow Jones Industrial Average 30 (“the Dow”), along with Citigroup. They will be replaced by Cisco and Travelers. (CNBC)

Update: If you’re really into this topic, you can read the Administration’sbackground briefing (for the press) that they held last night.

(Editorial note: I was doing so well moving to shorter posts. I fail miserably in achieving that goal here. I went the comprehensive route instead. I promise to return to shorter posts in the future. Buckle up – this is a long ride. I hope you find it’s worth it.)

(Update: There’s an important correction in #3 below. The estimated job loss for the option I think most closely approximates the Administration’s proposal should be about 50,000 over five years, rather than about 150,000 over five years. I apologize for the error.)

There is not yet much data available on the President’s CAFE announcement. Luckily, we have a huge base of analysis that the National Highway Traffic Safety Administration (NHTSA) did in 2008 that allows us to infer a lot from what was announced. Here are the specific data points we have from the President’s announcement:

The average fuel economy standard will be 35.5 mpg in 2016. That’s a weighted average of all cars and light trucks sold in the U.S.

Assuming that the Wall Street Journal’s reporting is accurate, they would require cars to hit 39 mpg by 2016, and light trucks to hit 30 mpg by 2016.

These fuel standards are the implementation of a law proposed by President Bush in January 2007, and passed by (a Democratic majority) Congress and signed by President Bush in December, 2007. The Bush Administration developed rules to implement the law and brought them right up to the goal line, but did not finalize them before the end of the Administration.The Obama Administration has now significantly modified the Bush rules.

Technically the Administration is today announcing that they will release a new proposed rule. While the news coverage makes it sound like this is a done deal, this is the beginning of a regulatory process, not the end. Still, the starting point is extremely important.

In developing the Bush proposal, NHTSA developed six options. I will show you four of those. Conveniently, what we know about President Obama’s proposal lines up almost perfectly with one of those options. This allows us to use NHTSA analysis of this option to make some initial estimates of the effects of the President’s new proposal. As always, you can click on the graph to see a larger version.

This graph shows the fuel economy requirements, in miles per gallon (mpg), for a nationwide fleet average. In actuality there will be two standards, one for cars and one for light trucks (SUVs are light trucks). It gets even more complex than that, because the standard adjusts for vehicle footprint (the shadow made by the vehicle when the sun is directly overhead). This incorporates an element of vehicle size in the requirement as a proxy for safety. If everyone just moved to tiny little vehicles, we would get much better fuel economy, but we would also have more highway fatalities. So the NHTSA methodology balances fuel efficiency and safety. The “S” in NHTSA stands for Safety. For reasons that I fail to understand, safety sometimes gets taken for granted in the Beltway policy debate relative to fuel efficiency, environmental benefits, and economic costs.

The four lines are from NHTSA’s analysis for the rule that we (the Bush Administration) did not quite finalize:

Green is the baseline – what the standard would be if the Administration did nothing.

Yellow shows the Bush proposal. This line is the result of a methodology that tries to maximize net societal benefits (= total societal benefits minus total societal costs).

Blue shows a different methodology, in which the standard is raised until total societal costs equal total societal benefits, so net societal benefits equals zero. This is the highest you can go before the model says that the rule is making society (in the aggregate) worse off, taking into account all costs and benefits. This line and option are labeled TC=TB.

The red line is the extreme upper end of what NHTSA thinks can be done if all manufacturers use every fuel economy technology available, without regard for cost. No one suggests it is a viable policy option, but it is a useful reference.

The purple dot is what we know about the Obama proposal. We only have a 2016 figure, which is conveniently right in line with the TC=TB option analyzed by NHTSA last year. So I’m going to make an assumption that the Obama proposal roughly matches this blue line in the intervening years. When I compare the separate numbers we have from the Administration for cars and light trucks with the six NHTSA options, they line up in a similar fashion with the TC=TB option, reinforcing my view that this is a solid assumption. This means I will use the NHTSA estimates of the TC=TB blue line option as a proxy for the effects of the Obama proposal. Technically, someone can quibble that it’s not precisely identical, but until I see data to the contrary, that’s just quibbling.

This means the Administration can dismiss the entire analysis that follows by saying their proposal differs from the TC=TB option. I cannot disprove such a claim if they make it, but my response would be, “How different? Show me.” I feel quite comfortable using this option for my own analysis, and will do so until presented with an alternate set of numbers by the Administration. (I helped coordinate much of this policy process for President Bush in 2007 and 2008.)

Here are ten things you might want to know about President Obama’s new fuel economy proposal. I will reference some tables and analysis from the NHTSA analysis done for the near-final Bush rule. This is a long list, so this summary will let you skip around as you like:

You can see this from the graph above. Within the Bush Administration we considered a range of options that would raise average fuel economy by between 1% per year and 4% per year. Our near-final rule would have raised this combined car/truck average about 4.7% per year from 2010 through 2015. My math shows that the Obama proposal would raise this same measure about 5.8% per year through 2016. That’s really aggressive. (In this post all years are Model Years for vehicles.)

Note: The press is reporting that Team Obama says they’re doing about +5% per year. They’re measuring starting in 2011.I use 2010 so I can compare Bush and Obama.

2. Rather than maximizing net societal benefits, this proposal raises the standard until (total societal benefits = total societal costs), meaning the net benefits to society are roughly zero. This is not an invalid framework for making a policy decision, but it is unusual. It represents a different value choice.

The NHTSA analyses look at a range of benefits to society, including economic and national security benefits from using less oil, health and environmental benefits from less pollution, and environmental benefits from fewer greeenhouse gas emissions (this is new). They also consider the costs, primarily from requiring more fuel-saving technologies to be included by manufacturers. NHTSA assumes these increased costs are passed on to consumers. More expensive cars mean that fewer cars are sold, which means that fewer auto workers are needed. NHTSA calculates economic costs to car buyers and to society as a whole, and job losses among U.S. auto workers.

A standard rule-making methodology is to look at all the costs to society, and all the benefits, and make them comparable (by converting them into dollar equivalents). You then ask, What policy will maximize the net benefit to society as a whole, taking into account all costs and benefits? This is the approach NHTSA used in building the yellow line.

The blue line represents a different approach. (See the TC=TB line on Table VII-6 on page 613 of the NHTSA analysis.) You take the same analysis of costs and benefits, but instead ask, How much can we increase fuel economy before the costs to society as a whole outweigh the benefits to society as a whole? This results (in theory) in no net benefit (and no net cost) to society, but allows you to maximize the fuel economy subject to this constraint.

The Obama Administration’s numbers are in line with this latter approach. It’s not wrong. The Obama approach is quite different. It represents a different value choice, in which a higher priority is placed on the benefits of increased fuel economy, and lower priorities are placed on increased costs to car buyers and job loss in the auto industry.

3. NHTSA estimated that a similar option would cost almost 150,00050,000 U.S. auto manufacturing jobs over five years.

Update: I was sloppy and missed the note on page 585 which said that table VII-1 shows cumulative job losses. Thus, the total over five years is 48,847 (which I’ll write as “almost 50,000″), and not the 148,340 I earlier calculated. I apologize for the error, and thank James Kwak for catching my mistake.

See Table VII-1 on page 586 of the NHTSA analysis. NHTSA estimated that the TC=TB option, which I’m using as a proxy for the Obama plan, would result in the following job losses among U.S. auto workers:

MY 2011

MY 2012

MY 2013

MY 2014

MY 2015

5-yr total

8,232

24,610

30,545

36,106

48,847

148,340

Compared to the Bush draft final rule, this is 118,00037,000 more jobs lost.

Since I know this table is inflammatory, I will anticipate some of the responses:

This is an estimate for the job loss from the TC=TB option analyzed by NHTSA in 2007. This is the closest proxy for the Obama rule, and I’m convinced it’s a good proxy until someone demonstrates otherwise. But technically, it’s not a job loss estimate for the Obama proposal.

This estimate was done in a different economic environment (late 2008), and before the U.S. government owned 1.5 major U.S. auto manufacturers. My guess, however, is that these changed conditions should push the estimated job loss up from the above estimate, rather than down.

There’s a false precision in the above table. It’s just what NHTSA’s model spits out. I draw this conclusion: The Obama plan will increase costs enough to further suppress demand for new cars and trucks. This will cause significant job loss, and probably in the 150K40K range over 5-ish years, with a fairly wide error band. I don’t put any weight on the precise annual estimates.

4. NHTSA guesses that under a similar option, manufacturers will make huge increases in dual clutches or automated manual transmissions, a big increase in hybrids, and medium-sized increases in diesel engines, downsizing engines, anddialing back turbocharging.

NHTSA does a detailed analysis of the costs of new technologies to improve fuel efficiencies, and they talk to the manufacturers and examine their product plans. They then guess what technology changes the manufacturers might make to comply with a higher fuel efficiency standard. Here are their estimates for increased penetration in MY 2015 for various technologies under the TC=TB / Obama proxy option. This is from Table VII-7:

Baseline

TC = TB

(Obama proxy)

Increased penetration

Dual clutch or Automated manual transmission

8%

60%

+52%

Hybrid electric vehicles

0%

24%

+24%

Turbocharging & engine downsizing

11%

24%

+13%

Diesel engines

0%

12%

+12%

Stoichometric gasoline direct injection

30%

39%

+9%

It would be great it if a commenter could educate us a little on these technologies.

5. The proposal will have a trivial effect on global climate change.

I always chuckle when elected officials boast about the number of tons of carbon that a policy proposal will not inject into the atmosphere. The White House is doing so today, emphasizing “a reduction of approximately 900 million metric tons in greenhouse gas emissions.” That sounds like a a lot, but who the heck knows?

We are fortunate that NHTSA analyzed the climate effects of all six options in terms more amenable to our comprehension.Here are their estimates for baseline, the Bush option, and the TC=TB (Obama proxy) option. This data is from Table VII-12 in the NHTSA analysis:

CO2 concentration (ppm)

Global mean surface temperature increase (deg C)

Sea-level rise (cm)

2030

2060

2100

2030

2060

2100

2030

2060

2100

Baseline

455.5

573.7

717.2

0.874

1.944

2.959

7.99

19.30

37.10

Bush

455.4

573.2

716.2

0.873

1.942

2.955

7.99

19.28

37.06

TC=TB(Obama proxy)

455.4

573.0

715.6

0.873

1.941

2.952

7.99

19.27

37.04

OK, this still doesn’t mean a lot to me. Let’s take some more data from the same NHTSA table, and see the change from the baseline of not raising fuel economy standards at all. Now we can see the direct climate benefits of these proposals:

CO2 concentration (ppm)

Global mean surface temperature increase (deg C)

Sea-level rise (cm)

2030

2060

2100

2030

2060

2100

2030

2060

2100

Bush

.1

-.5

-1.0

-.001

-.002

-.004

0

-.02

-.04

TC=TB (Obama proxy)

.1

-.7

-1.6

-.001

-.003

-.007

0

-.03

-.06

Ah ha! This is useful information. As you can see, the effects are trivially small:

Both options would reduce the global mean surface temperature by one-thousandth of one degree Celsius by 2030. The Obama option would reduce the global temperature by seven thousandths of a degree Celsius by the end of this century.

The effects on sea level are too small to measure by 2030. By 2100, the Obama proposal (technically, the TC=TB proxy) would reduce the sea-level rise by six hundredths of a centimeter. That’s 0.6 millimeters.

Hmm. That’s not too much, especially when you consider this is the policy that will affect the #2 source of greenhouse gas emissions in our economy. (#1 is power production.)

In anticipation of some pounding by the climate change crowd:

These are NHTSA’s calculations using the MAGICC model, not mine. I’m just reporting their results.

If you have different estimates, I’m happy to consider posting them for comparison. I am less open to arguments about why the MAGICC model is wrong, or why NHTSA’s inputs into that model are wrong. I don’t know the model well enough to debate the points.

Again, the point is not the precise estimates. It’s the order of magnitude. Please don’t tell me this model is flawed. If you disagree with these calculations or this model, give me some numbers you think are better, and that lead to a different conclusion.

Imagine if the President had instead said today, “This new fuel economy and greenhouse gas emissions rule will slow the increase in future global temperature seven thousandths of a degree Celsius by the end of this century, and it means the sea will rise six tenths of a millimeter less than it otherwise would over the same timeframe.” It loses some of its punch, no?

Similarly, when the Supreme Court pushed in Massachusetts v. EPA toward regulating greenhouse gases from new cars and trucks to protect the public health and welfare from “endangerment,” I wonder if they understood that an aggressive proposal would reduce the future sea level increase by 0.6 mm?

6. The national standard = the California standard (roughly).

Technically, the Administration will be setting two standards: one for fuel economy, and another for CO2 emissions from tailpipes. In theory, the two will (basically) match up, hand-waving past a lot of second-order things like flexible fuel vehicle credits and new vehicle air conditioning standards.

During the Bush Administration there was a tussle between California and the federal government. California wanted a waiver to be able to set their own standards for CO2 emissions from cars and light trucks. Another 13 or so States wanted to follow a new California standard. The proposed California standard was significantly more aggressive than anything discussed in Washington.

We argued that having multiple emissions standards would be inefficient. Auto manufacturers would then have either to make cars to meet two different standards, or just dial up the fuel efficiency on all vehicles, so that the California standard would become the de facto national standard.

The President resolved this today by (basically) setting one national standard for fuel economy, and a roughly parallel standard for CO2 tailpipe emissions, that approximate the higher California standard. California is happy that they got their higher numbers. The auto manufacturers avoid the inefficiencies of multiple standards, while having to eat (actually, pass on to customers) the higher costs of making even more fuel efficient vehicles.

7. The auto manufacturers got rolled by the Governator.

The heads of several auto manufacturing firms stood with the President today and smiled. They lost this fight. They pushed incredibly hard during the 2007 legislative battle, and during the subsequent regulatory process, for a fuel economy standard that rose about 2% per year. They dug in hard against a growth rate greater than 3% per year, and told us that 4% per year would destroy them. Our near-final rule averaged about 4.7% per year. The Obama rule averages about 5.8% per year. Either way, this is way, way more than the auto manufacturers wanted.

They had no leverage, of course, and an outcome similar to this was predictable after the November election. So they’re putting the best face they can on it. Interestingly, the press statement from Ford CEO Alan Mulally does not say that he endorses the specific numbers proposed by the President, but instead (emphasis is mine):

Today’s announcement signals the achievement of a crucial milestone – an agreement in principle on a national program for increased fuel economy and reduced greenhouse gases.

This national program willallow us to move forward toward final regulations that all stakeholders can support. We salute the cooperative efforts of the Obama Administration, the state of California, environmental groups and others that played a constructive role in this process.

The framework of the national program will give us greater clarity, certainty and flexibility to achieve the nation’s goals. We will continue to work with the federal agencies to finalize the standards that we are committed to meeting.

Tip for reporters: Ask Ford (and the other manufacturers) if they support the specific numbers proposed by the President today. The statement above is trying to leave Ford wiggle room to argue for smaller numbers in the rulemaking process. If the auto manufacturers wiggle, then you have a repeat of the situation from last week’s health care announcement.

And of course, 1-2 of the U.S. auto manufacturers are now controlled by the U.S. government.

8. Granting the California waiver means California has leverage for next time.

As I understand it, the Administration is technically granting California its EPA waiver, and California has agreed not to invoke it for this process (MY 2011 – MY 2016). Assuming the waiver doesn’t get un-revoked (can it be?) by a future Administration, this means that next time around California will begin the process with the authority to set its own tailpipe emissions standard.

This means that, when we do this again in about five years, California holds all the cards. To quote the Governor in another context (wait for it), “Ill be back.” California will have leverage to set its own standard, which means they can again dictate the national standard. The Obama Administration has moved the primary decision-making locus for future vehicle fuel efficiency rules from Washington DC to Sacramento.

9. In Washington, EPA is now in the driver’s seat, not NHTSA.

The Administration has said there will be two rules. NHTSA will set a fuel economy rule, and EPA will set a tailpipe emissions rule. We know that EPA will always be more aggressive than NHTSA. This means that, to the extent Washington remains involved in future standards (see #8 above), the primary decision-maker becomes EPA rather than NHTSA, since auto manufacturers will have to comply with the more aggressive of the two. NHTSA does not become irrelevant, but the bureaucratic strength is definitely shifting.

This bureaucratic power shift suggests a higher priority will be placed in the future on environmental benefits, and a lower priority on economic costs and safety effects, as we see with today’s proposal.

10. Todays action will accelerate EPA’s regulation of greenhouse gas emissions from stationary sources.While Congress is futzing around on a climate change bill, EPA is getting ready to bring their “PSD” monster to your community soon.

EPA is in the midst of taking comments on an “endangerment finding” that is a huge deal in the climate change policy world. If the EPA Administrator finds that greenhouse gas emissions from new cars and trucks “endanger public health and welfare,” then it starts a regulatory process. It appears the President is prejudging the result of this regulatory comment process: “the Department of Transportation and EPA will adopt the same rule.”

As a former colleague has taught me, a proposal to regulate greenhouse gases (under section 202 of the Clean Air Act) would greatly accelerate when greenhouse gases become “subject to regulation” under the Clean Air Act. This would trigger ramifications that reach far beyond cars and trucks. As early as this fall, greenhouse gases could become “regulated pollutants” under the Clean Air Act. Once something becomes a “regulated pollutant,” a whole bunch of other parts of the Clean Air Act kick in, and EPA is off to the races in regulating greenhouse gases from a much (much) wider range of sources, including power plants, hospitals, schools, manufacturers, and big stores.

One of the scariest elements of this is called the “Prevention of Significant Deterioration” permitting system. In effect, EPA could insert itself (or your State environmental agency) into most local planning and zoning processes. I will write more about this in the future. It terrifies me.

As a novice blogger I have been repeatedly surprised and humbled by the thoughtful comments posted on this blog. I want to thank all of you who are contributing to a civil and thoughtful discussion.

At the risk of offending some of you, I am going to push back on some of the comments to yesterday’s Chrysler post, in the way that I would have done so had you been advisors to President Bush and I been in my old job at the White House National Economic Council. I’m putting my “honest broker” hat on, and I want to stress that this pushback is independent of my own policy views.

In yesterday’s post I listed five options. Option A was to withhold all additional taxpayer funds. This is the pure free market option, and also the most popular option among the commenters. I asked you to assume that choosing Option A would mean a 99% chance that Chrysler would liquidate by July 1st, and an additional 10-20% chance that GM would liquidate.

The first two commenters seem to have internalized that and be willing to bear these costs. FogCity wrote “Liquidation of Chrysler sets the stage for renegotiations with the UAW [in the GM talks].” DonH similarly writes, “There is too much car-making capacity in the world.”

Some of the commenters, however, want to have it both ways: choose Option A, but assume that Chrysler will not fail. I strongly support your choice of option A, as long as you accept that this choice means a few hundred thousand people will lose their jobs in the next 2-3 months, and that you will be (unfairly) blamed in public for their job loss. If you choose A, you need to assume that there will not be another buyer for Chrysler, and that the Chapter 11 process will quickly turn to liquidation, with the subsequent job loss. You’re not making a real choice if you assume that A might lead to a happy ending for Chrysler employees.

At the risk of overemphasis, I want to make it clear that I think there is a very strong case you can make for Option A, and several of the commenters are making it. But that case has to be structured as “I’m for option A because _________, even though several hundred thousand people will lose their jobs. The long-term benefits of option A are worth the short-term costs to Chrysler workers and retirees, and to the Upper Midwest region.” To refine the political side of it, ask yourself if you would be willing to defend your view on a Detroit TV station or in an interview with the Detroit Free Press.

I hope that this response will be interpreted the way it is intended: as my attempt to push you to think hard about your choices, and to force you to acknowledge that there is a real tradeoff between short-term pain for hundreds of thousands of people and the long-term benefits of allowing free markets to operate unfettered. If you are for Option A, I hope you will try to make the case that these costs are worth the benefits, rather than pretending that the costs don’t exist.